introduce new requirements that must be met by all foreign organisations. Potential investors in Vietnamese credit institutions should be aware of these proposed changes, as they are easier to meet in some instances; and

speed up the acquisition process for foreign investors by providing for less stringent approval requirements.

In the past year, the Vietnamese Government and the State Bank of Vietnam (SBV) have taken various measures to improve the strength of Vietnam's banking sector, which, it is widely acknowledged, has been placed under significant strain as a result of a downturn in the global and domestic economy and the high level of resulting non-performing loans. For example, throughout 2012, various legal instruments were introduced to implement the Government's strategy to forcibly consolidate struggling Vietnamese banks. To further support this restructuring of the banking sector, the Government is attempting to make foreign investment in Vietnam's banking sector more attractive by expanding the scope of potential investment, and allowing foreign investors a greater degree of control in their investments.

The SBV's recently released draft decree and circular proposing amendments to the existing regulations on foreign ownership of Vietnamese credit institutions (the Draft Law) will expand the application of the current law.

Currently, foreign ownership in Vietnamese banks is governed by Decree 69 on Purchase by Foreign Investors by Vietnamese Commercial Banks, and its implementing legal instruments (the Current Law).

Limits on foreign ownership

The Current Law imposes a 30 per cent aggregate cap on foreign ownership in any Vietnamese commercial bank, along with several sub-limits in ownership applicable to various categories or groups of investors. Generally speaking, the Draft Law does not alter the current total cap on foreign ownership of 30 per cent. However, it does allow the Prime Minister to increase this figure in special cases of restructuring of 'weak' credit institutions.

The Draft Law also appears to increase certain permitted levels of ownership in Vietnamese credit institutions. For example, foreign strategic investors will be permitted to own up to 20 per cent of a Vietnamese credit institution (compared to the 15 per cent limit, or 20 per cent with Prime Ministerial approval, under the Current Law), and other foreign organisations will be permitted to own up to 15 per cent, with a 20 per cent limit applying collectively to each foreign investor together with its affiliates (compared to the 5 per cent and 10 per cent limits that apply under the Current Law).

Below is a comparison between the Current Law and Draft Law in relation to the limits on foreign ownership:

Current Law

Draft Law

Any foreign investor and its affiliates, not being a foreign credit
institution or foreign strategic investor – 5 per cent

Any foreign credit institution and its affiliates – 10 per cent

Any strategic investor and its affiliates – 15 per cent (or 20 per
cent with Prime Ministerial approval)

Total level of shareholding of all foreign investors and their affiliates –
30 per cent

Any foreign individual – 5 per cent

Any foreign organisation – 15 per cent

Any foreign strategic investor – 20 per cent

Any foreign investor and its affiliates – 20 per cent

Total level of shareholding of all foreign investors and their affiliates – 30
per cent (can be increased by the Prime Minister in special cases of restructuring of 'weak' credit institutions).

Certain aspects of these ownership limits remain unclear as drafted in the Draft Law. In particular, the Draft Law specifies that the limits include direct and indirect ownership, but does not specify how indirect ownership is determined. It also provides limits that apply to investors 'and their affiliates'; however, no detailed definition of the word 'affiliate' is offered, as it is in the Current Law. Clarification of these concepts will enable a better understanding of the potential effect of the Draft Law on foreign investors.

Requirements of foreign investors

Although the Draft Law proposes an increase in foreign ownership limits in many instances, it also introduces a greater number of requirements that must be met by potential foreign investors. However, the proposed new requirements are not necessarily more onerous.

In addition to the above requirements, a strategic investor must give an undertaking to assist the Vietnamese bank in which it purchases a shareholding. There are no requirements for foreign individuals and other types of foreign organisations under the Current Law (though their ownership is capped at 5 per cent).

The Draft Law imposes no requirements on foreign individuals or foreign organisations (including foreign credit institutions) with less than a 10 per cent shareholding in a Vietnamese credit institution.

The following rules apply to a foreign organisation looking to acquire 10 per cent or more in a Vietnamese credit institution:

it must have a stable rating from international credit agencies;

it must have sufficient financial resources for the acquisition;

the acquisition must not affect the safety and stability of credit institutions in Vietnam, and must not result in a monopoly or restraint on competition;

it must not have committed any serious breach of law in its home country or in Vietnam in the past 12 months; and

it must have an asset base with a minimum value of US$10 billion (in the case of a foreign credit institution) or a minimum charter (ie share/equity) capital of US$1 billion (in the case of other types of foreign organisations).

In the case of foreign strategic investors, the requirements proposed by the Draft Law appear to be similar to those contained in the Current Law. In addition to requirements (i) – (iv) above, a foreign strategic investor must: be a credit institution; have at least five years of international banking experience; have an asset base of at least US$20 billion; and give an undertaking and have a clear plan to support the Vietnamese credit institution. Unlike other foreign organisations, the Draft Law provides that strategic investors must also undertake to own at least 10 per cent in the relevant Vietnamese credit institution, but must not own 10 per cent or more of any other credit institution in Vietnam.

The Draft Law also now makes it clear that foreign organisations include: (i) organisations established overseas and their branches in Vietnam; and (ii) organisations, closed-ended funds, members' funds, and securities investment companies established and operating in Vietnam with a foreign ownership ratio of 49 per cent or greater.

Requirements for Vietnamese banks

The Current Law only allows foreign investment in Vietnamese commercial banks that meet certain requirements, including a charter capital of at least VND 1 billion (approximately US$$50,000) and a 'healthy' financial status. The Draft Law proposes to remove all requirements and allow all Vietnamese shareholding credit institutions to have foreign investors.

Transfer price

The Current Law requires that the transfer price of shares be no less than the auction price in the case of equitised State-owned commercial banks. In the past, this issue has caused difficulties in negotiations between equitised State-owned commercial banks and foreign strategic investors. However, the Draft Law provides that parties can agree on a transfer price in the case of non-listed Vietnamese credit institutions, rather than being held to the auction price. In the case of listed Vietnamese credit institutions, the Draft Law proposes that the transfer price be determined according to the laws on securities.

Approval requirements

The Draft Law proposes to reduce the number of transactions that are required to be registered and/or approved by the SBV. While the Current Law requires all transactions involving foreign investors to be approved and registered, the Draft Law proposes that approval should only be required in the case of share acquisitions of more than 10 per cent by a foreign investor, and a change in a major shareholder (holding 5 per cent or more in the credit institution). In all other cases, only internal approval of the target credit institution would be required. In addition, the Draft Law provides for a simpler and more transparent approval process for cases where approval of the SBV is required.

The SBV is currently in the process of accepting public comment on the Draft Law, with a view to releasing the finalised legal instruments in the near future. We will report on the final law when issued.